Chartered Financial Analyst (CFA) Practice Exam Level 2

According to the EBITDA calculation, which of the following comes first?

1. EBIT

2. Sales

3. Net Income

4. Cost of Goods Sold

The correct answer is: Sales

In the EBITDA calculation, sales are fundamental as they represent the total revenue generated by a company before making adjustments for costs and expenses. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, which is a measure used to evaluate a company's operational performance. To derive EBITDA, one typically starts with sales (or total revenues) and then adjusts for operating expenses, excluding interest, taxes, depreciation, and amortization. This clear flow underscores why sales are the initial figure in the calculation process. Understanding this sequence is important, as it ensures that students grasp how operational efficiency is analyzed before considering other financial components. When thinking about EBITDA, it's essential to recognize that it focuses specifically on operating performance by starting with revenues, while elements like EBIT, net income, and cost of goods sold represent subsequent concepts that involve additional deductions or calculations.